Is the freemium or discounted model a long-term sustainability trap?

The “discounting” trap is extremely difficult to come out of it; It’s a favourite of investors who look for exponential growth, without realising the long term impact

New ideas, new launches, new initiatives – the newspapers are full of startup stories these days. It’s a great feeling to read through all these ideas – some fresh, some innovative and some not-so-convincing.

I have been meeting a good number of entrepreneurs of late – full of ideas and energy. Some are trying to build an app that will help you to dry clean your clothes on a tap of a button, some trying to manage your finances on your mobile phones.

When I asked them what their plans of acquiring customers are, almost all of them have a similar response – a freemium model. Offer the services free of cost (or at a discount, where offering free is not feasible, like an e-commerce store) for a specific (or a limited) time, and then start charging the customers.

It sounds like a perfect model, especially when one is boot-strapped, as marketing otherwise comes at a heavy cost. But at the same time, it is extremely important to ensure that the discounting model doesn’t turn out to be a death trap in the medium or long term.

I’ve seen numerous situations wherein a startup launches a product or service and offers it either free or at a heavy discount, luring potential customers to try their offering, and hoping they will stay with them for good. The idea is to ensure that the customer tries the service, and eventually will get hooked on to it, resulting in continuous patronage. Response is generally decent, since consumers don’t mind freebies. Of course if the service (or product) is good enough, consumers will continue to use the service and you feel you have arrived.

Well, the tough part starts from there and the question that every entrepreneur has: How long can these discounts continue? Will there be an erosion of customer base if I stop the discounts?

There is no perfect timeline for this, as it gets driven by your competitors, or your investors. If there is investor money involved, your appetite for extending discounts is bigger, and vice versa.

And this is typically what has happened with a lot of startups: Launch a service, offer discounts, get customers, and eventually shutdown because of lack of funds.

And that makes me think — is technology the disruption or the discounts offered?

Of course it’s the technology, as it has enabled one to come up with an innovation. But then sustainability depends completely on how long can you offer discounts, or in fact, will you have customer loyalty if you stop discounts. In general, if we have two similar offerings in the market (with similar quality and features), consumers tend to stay with the one that has deep pockets and offers discounts for a longer time. Or to put it simply, the one which is heavily funded. So at the end of the day, it all boils down to how much money you have in your pocket, and technology may take a back seat.

This is where the freemium model becomes a trap and it becomes extremely difficult to come out of it, even if you had the first mover advantage.

So as an entrepreneur what should one do? Well, to begin with, let’s accept you can’t ignore such models as it gives you an easy access to your consumers. But at the same time, if your concept is unique, and you are confident about it, you may want to revisit this strategy.

If you have an idea that is saleable, and adds immense value to the consumers, work on a strategy that communicates the advantages clearly, and convinces the consumers that it’s worth it to invest in your offering.

Some of the options could include starting with a base product that’s free of cost, and adding exciting features at a cost. Alternately, you can offer a 6 months or 12 months subscription that may be economical for the users, and ensures they stick to the product/service for a longer time, enabling you to get breathing time to retain them for long.

The growth will not be a hockey-stick growth, but then why do you need it? You need a product that’s well accepted in the market, gets revenues, and has a strong word-of-mouth appeal. This way, you will also be able to test the waters, and slowly increase your user base too. Of-course, this holds good as long as your idea is unique, and doesn’t have a funded competitor. And if you have a funded competitor, the probability of you being funded before them is much higher since you anyways have the first mover advantage.

But then, one must consider this option rather than falling into the plain discounting trap, as it’s extremely difficult to come out of it. It’s a favourite of investors who look for exponential growth, without realising the long term impact of the same. So when you are planning your marketing strategy, take a deep breath, think about the long term vision and have a plan that will enable you not to be sucked in as one of the offerings that lasted till the discounts.

As a founder, your due diligence in all aspects of your offering, right from conception to market readiness, and you should have the ultimate authority to decide on how it needs to be sold. After all, at the end, you will take full accountability of a product’s success or failure, and the investor won’t.